3 banking share ideas operating around the globe3 Jun 2023 15:11
Looking to invest in banks? We take a closer look at three banks with revenue streams across the globe and the opportunities on offer.
Lloyds – a traditional UK lender
Lloyds is a good barometer for the overall health of the UK consumer and its smaller businesses. The bank's first-quarter performance was solid, outperforming analyst expectations. Impairment charges set aside for loan defaults were lower than feared, which is a positive sign.
Lloyds is more exposed to the interest rate cycle than others, as 76% of its total income is interest-related. Net interest margin was steady over the quarter, which was a relatively good result. However, it’s expected to dip over the second quarter as some of the more profitable mortgages issued over the pandemic come up for renewal at less profitable levels.
There’s also increased pressure on banks to offer higher interest on deposits as consumers and businesses shop around for the best rates.
Nevertheless, if management's predictions of a year where margins are greater than 3.05% are correct, it will be positive for income. There’s the potential for more rate hikes this year, which could help offset some of the mortgage headwinds.
One of the things we like about Lloyds is its grip on costs. Last year, its cost:income ratio was the lowest among the large UK-listed banks. That's not an accident either, costs have been a focus for several years now. In an environment where inflation looks like it might be sticky, a market leading position on relative costs is a good place to be.
The balance sheet's also a strength, paving the way for an ongoing £2bn buyback programme. Management pledged a return of further excess capital over the next two years, and the forward dividend yield of 6.2% is attractive and ahead of the longer-term average. As usual, yields are variable, and no dividend is ever guaranteed.
DIVIDENDS VS SHARE BUYBACKS – WHAT INVESTORS NEED TO KNOW
Aware of its reliance on interest income, there are plans to diversify. But for now, Lloyds remains one of the more sensitive banks to interest rates. Given the environment, we like the name, and the valuation looks undemanding.
However, investors should be aware that a worse-than-expected downturn or a downward shift in interest rate expectations would hit Lloyds harder than others.
https://www.hl.co.uk/news/articles/3-banking-share-ideas-operating-around-the-globe?
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